ECON 401 Lecture 4: Lecture 4

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2 Jul 2016

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Assume the utility function is increasing, convex. Assume in the optimum the consumer buys a strictly positive amount of both goods: q1 > 0 and q2 > 0. Condition 1: optimal consumption is on the budget line. Condition 2: marginal rate of substitution = price ratio. The red dot in the picture below is where optimal consumption would be. Marginal rate of substitution = - price ratio. P1 = 2; p2 = 1; y = 10. Constant in absolute value as we move to the right on an indifference curve. (linear indifference curves) The consumer spends all the budget on the good with larger marginal utility per dollar. Interpretation: the consumer wants to consume goods 1 and 2 in an ideal ratio of 2 : 1: q1 = 2q2: If q1 > 2q2, then the additional q1 does not raise utility. If 2q2 > q1, then the additional q2 does not raise utility.

Related Questions

3. (5 points) Jerry lives in an economy with two goods: bananas and apples. Bananas cost $1 each and apples cost $3 each. Suppose that Jenny is an optimizing consumer with indifference curves that are strictly convex, and that we observe that Jerry buys 1 banana and 4 apples. Draw a graph that shows Jerry's (1) budget constraint, (2) optimal consumption point, and (3) the indifference curve that goes through the optimum point. In your graph, place quantity of apples on the horizontal axis.

An Individual consumes good X1 and X2. Let W be the wealth of the individual and P1>0, P2>0 be the prices of the goods. For each of the utility functions provide a real life example of two goods X1 and X2 that satisfy them, draw the indifference curves, determine whether preferences are convex, strictly convex or neither, and compute the Walrasian demand, indirect utility function, Hicksian demand, and Expenditure function.

U (X1, X2) =(X1^0.4) *(X^0.6)
U (X1, X2) =min (X1, X2) +3 max (X1, X2)

jademouse708

1. Economists use ____________ as a measure of the relative level of satisfaction when someone consumes a good or service.

2. Sue likes brownies. However, Sue notices that the more brownies she eats the less satisfaction she receives from each extra brownie. We can say that Sue is experiencing ___________________ from each extra brownie.

sugar sickness

total utility

diminishing marginal utility

increasing marginal utility

3. When total utility is maximized, the marginal utility will be

4. Consider Dirk and Lee. They are both eating pizza. Which of the following statements is true regarding their satisfaction and utility?

Dirk and Lee both receive 10 utils from eating pizza.

Dirk and Lee both receive the same level of satisfaction from eating pizza.

Dirk gets more twice as much satisfaction as Lee from eating pizza.

It is difficult to determine because the utility is subjective.

5. For many products, the total utility curve is

strictly increasing because of increasing marginal utility.

strictly decreasing because of diminishing marginal utility.

increasing initially because of increasing marginal utility, but eventually decreases.

increasing initially at a decreasing rate because of diminishing marginal utility but eventually decreases.

6. When consumers get the biggest bang for the buck, we say they

used the loudest gun in hunting season.

reached a consumer optimum.

minimized consumer satisfaction.

maximized marginal utility.

7. By choosing to consume at the consumer optimum, consumers will

maximize their total utility.

minimize their total utility.

maximize the amount they spend on each good.

minimize the amount they spend on each good.

8. A consumer is in equilibrium when consuming two goods when which of the following holds?

MU_a/ P_a = MU_b/ P_b

MU_a/ P_h =MU_b/ P_a

P_a/ MU_a = P_b/ MU_b

MU_a x P_a = MU_bxP_b

9. If the marginal utility of good 1 is 15 and its price is $3, and the marginal utility of good 2 is 12, and its price is $4, then the consumer

has achieved a consumer optimum.

should increase his or her consumption of good 1.

should increase his or her consumption of good 2.

should decrease his or her consumption of good 1.

10.Suppose the price of an iPod decrease and the price of HD TVs remains the same; what noticeable effect(s) occur(s)?

the substitution effect only

the real-income effect only

the substitution effect and real-income effect, if there is a noticeable change in purchasing power

the substitution effect and real-income effect, if there isnât a noticeable change in purchasing power

11. The ______________ paradox was described by Adam Smith in 1776.

12. What is the key to solving the diamond-water paradox?

more water and fewer diamonds

marginal utility

total utility

consumer demand

13. When solving the diamond-water paradox we notice that the marginal utility of

diamonds are equal to the marginal utility of water.

diamonds are greater than the marginal utility of water.

diamonds are less than the marginal utility of water.

water is equal to its price, and therefore lower than the marginal utility of diamonds.

14. The consumer surplus for water is

greater than that for diamonds because water is nonessential.

greater than that for diamonds because water is essential.

less than that for diamonds because water is nonessential.

less than that for diamonds because water is essential.

15. Suppose a consumer consumes only diamonds and water, and the price of diamonds increases. All else being equal, a consumerâs marginal utility for diamonds

decreases and the marginal utility for water stays the same.

increases and the marginal utility for water decreases.

decreases and the marginal utility for water increases.

increases and the marginal utility for water stays the same.

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ECON 401 Lecture 4: Lecture 4

ECON 401 Full Course Notes

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